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Investment Ideas

Growth versus value investing

It can be tricky to decide where to invest your money. Taking a risk doesn’t always pay off, but playing it too safe could also leave you with lower returns than you had hoped for. Different investment styles can also be confusing, with two of the most popular options being growth investing and value investing. Which of the two to use is often a source of debate, so we’ve written an article to help you find out more about the two styles of investing.

What is growth investing?

Growth investors are – perhaps unsurprisingly – focused on companies that they expect to grow faster than others in the market and offer strong returns which should increase investors’ capital. Growth companies are always looking to expand and tend to reinvest their earnings in the form of new employees, new equipment or new acquisitions.

What is value investing?

Value investors look for well-established companies that have fallen out of fashion and have bargain share prices that, in their opinion, don’t necessarily match their underlying worth. As time passes, they expect the market to realise the value of the company and to see the price increase.

Comparing the two

Price

Growth companies are considered to be ‘expensive’. They have highly priced stocks relative to their sales or profits because investors believe their growth will lead to higher profits in the future, making the current price more attractive than it seems. Value companies tend to be relatively cheaper. Investors buy them with the expectation that the share price will make a comeback over time.

Resilience

Growth companies tend to perform well when interest rates fall and company earnings rise. Where other companies may fall in periods of slow economic improvement, in theory growth companies have the potential to still achieve a healthy return. But since growth is the overall priority, they could suffer if the economy cools down.

Value companies are often found in cyclical industries, so they may have the potential to perform well when there is a period of economic recovery, but could struggle in a market where share prices are rising (a bull market). However, even if the stock doesn’t appreciate in value, investors may still benefit from dividend payments if the company pays them.

Risk

Growth companies are considered fairly risky. Negative news features about the company can affect the market or the company might not perform as well as was initially expected – for example, will Tesla ever deliver a profit for investors? This can potentially lead to prices plummeting, leaving investors with losses. The prices can swing heavily too, meaning they may be better suited to more risk-tolerant investors.

Value companies tend to carry less risk since they are usually larger. They have proven previously that they can deliver profits, although of course future share price increases aren’t a given. Plus, considering they will usually take time to turn their fortunes around, they could end up carrying more price fluctuation risk than growth stocks. Some stocks stay cheap as they fail to recapture former glories. These are so-called “value traps” – for example, will high street retailers ever bounce back given the rise of internet shopping?

Which style is better?

There is no one recipe for successful investing. Our list of top-rated funds includes growth managers like Jupiter European’s Alexander Darwall as well as value managers like Alex Savvides of JO Hambro UK Dynamic. Others managers put their own spin on these classic styles, or even combine the two. Styles can go in and out of favour, but the best managers tend to perform better regardless.

Still unsure? Let us invest for you

If you’re still unsure about where you want to invest your money, one of our Ready-made Portfolios could be worth considering. When choosing and reviewing the funds in each of the portfolios, we focus on the fundamental quality of the underlying managers and are not tied to a particular style of investing. The result is a diverse mix of funds from those fund managers who we believe are most capable of delivering for investors.

The value of your investment can go down as well as up, and you can get back less than you originally invested.

Past performance or any yields quoted should not be considered reliable indicators of future returns. Restricted advice can be provided as part of other services offered by Bestinvest, upon request and on a fee basis. Before investing in funds please check the specific risk factors on the key features document or refer to our risk warning notice as some funds can be high risk or complex; they may also have risks relating to the geographical area, industry sector and/or underlying assets in which they invest. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.